What is Three Stars in the South Candlestick Pattern?

Key Highlights

• The three stars on the south candlestick pattern are uncommon and do not often precede big price moves.
• Three black or red candles decrease in size after a price decrease from this pattern.
• It's a bullish reversal, although the price is expected to move in the predicted direction before the trade occurs.

Understanding Three Stars in the South Candlestick Pattern

One of the rare patterns that indicates a bullish reversal pattern is the three stars in the south pattern. It's taken place after a decline, signifying the beginning of the end of the bear market. Three black or red candles that decrease in size after a price decrease form this pattern. The pattern indicates a bullish reversal. As mentioned below, four specific requirements exist for creating three stars in a south pattern.

1. The overall sentiment in the market for such a security is negative.
2. The first candle is a long, true-body candle that is either red or black, with a long lower wick and no higher wick.
3. The second candle is again a black body, with a lower real body and more significantly lower than the first candle.
4. This sequence's final candle is a black candle with a small body and no wicks. The closing price of this Marabozu falls between the second candle's high and low points.

Identifying three stars in the southern sky requires these requirements, which are extremely rare to find. As each candle in the sequence progresses, the bears tend to lose momentum, according to the logic of the pattern. Ultimately, the candles lead the bulls to take over and reverse the trend. Slow declines in the downtrend are reflected in the three stars in the south candlestick pattern. A decrease in the daily price range and consecutive higher lows are recognised.

How do you trade the Three Stars in the South?

For instance, XYZ Security is in an active downtrend, and bears are attempting to profit from the declining prices. With a significant drop in prices, the initial candle of this pattern appears. Even so, as the first candle was closing below the day's low, bulls didn't have a lot of confidence in seeing it.

Another candle shows the XYZ security opening above the previous candle and does not record a new low. Bullish confidence is diminished by the closing price reduction compared to the open price. In the case of renewed bull commitment, the last candle of the pattern opens higher, but it does not take advantage of the price decline. The bears on the market have not achieved a new low, and their position as buyers has been weakened.

These three candles together form a small pennant pattern to indicate the decline in bear momentum and a rise in bull rally. However, only when prices start to rise in line with the pattern will the bull rally be confirmed.

The confirmation level is visible in the middle of the last red body. It is marked as confirmation if the prices above this limit are exceeded. Ideally, the lowest of the previous two lows will determine the level of stopping loss. After the extended position, if prices fall instead of increasing and closing up or making consecutive lows below the stop-loss bearish line while no pattern is detected, then a stop-loss will be triggered.

Psychology of Three Stars in the South

Suppose this security is going down downward, with momentum on the bears' side looking for lower prices. This is confirmed by a significant price drop at the first candle in the sequence. It closed above the day's lows, thus providing bulls with a ray of hope. The second candle opens over the bottom of the first candle, which does not succeed in creating a new low for security. Confidence in the bulls continues to be undermined in the market.

The third and last candles are opened, increasing the bull's confidence. However, the price decrease has yet to be exploited. Again, bears have failed to reach new lows, indicating their selling power is fading. The pennate pattern formed by the three bars allows bulls to gather momentum while signalling bullish exhaustion. But a bull run will only begin when the price moves upward following this pattern.

Limitations of Three Stars in the South Candlestick Pattern

The three stars in the south pattern are limited by a few limitations, as mentioned below.

1. The pattern is quite rare and doesn’t tend to allow the prices to take huge moves following it, which makes it less likely to be usable for trading purposes.
2. The aim of the pattern is not to determine a profit objective, which means that traders must increase their efforts to find profitable trades.

Conclusion

This article gives all the necessary details about the three starts in the south candlestick pattern. This is a rare bearish reversal pattern. This pattern is infrequent and does not tend to be followed by significant movements, thus making it of little use for trading purposes. The pattern does not aim to achieve a profit, and it is up to the trader to determine how they exit that profitable trade.